SCOREBOARD: American beauty

More good signs emerged for the US as retail sales exceeded expectations, though markets failed to find a bid.

Seeing US consumer spending surge is a wonderful thing. It really hammers home why it is ill-advised to be pessimistic on the US economy. It shows exactly why it is that growth is on a sustainable trajectory and the constant ever present fear, absolutely unfounded. Wake up! Embrace reality. Retail spending was forecast to rise 0.3 per cent in March and instead sales rose 0.8 per cent. Sales ex autos and gas rose by 0.7 per cent – in both cases after a strong February. These are strong numbers and so far for 2012, sales are running at a 10 per cent annualised pace – double the historical average, more than double actually.

That US stocks struggled to find a bid then, I find incredible. At the close the S&P500 was down 0.05 per cent (1369) and get this – even consumer stocks barely managed to bounce – consumer goods were up only 0.3 per cent! To be fair, most sectors did rise and the key outperformers were utilities, financials (after good profit result from Citigroup) and basic materials. It was really only tech, energy and consumer services that fell and weighed on the index. Indeed, the Dow rose 0.6 per cent (12921) but you get my point. You wouldn’t have thought the results would be mixed. It looks to be stock specific stuff here as far as I can tell – at least in the etch space.

So, for instance, Apple Inc fell about 4 per cent on speculation that phone carriers may cease subsidising phones. Tech stocks otherwise were belted as mentioned and the Nasdaq was down 0.8 per cent (2988). Otherwise for energy stocks, crude prices were reasonably soft – Brent down over 2 per cent to $118.49, while WTI rose 0.3 per cent $103.13, with pretty much all of that into the close. General softness here is being driven by an improving situation and rising oil stocks. Elsewhere the Aussie SPI rose 0.2 per cent (4312).

This is soft all considered, but I guess events in Europe are not helping sentiment. Well there are no new events in Europe, just old fears resurfacing, but the discussion is irrational. Spain, now as we know, is the fear. Yet Spain’s debt to GDP is comparatively low at around 85 per cent and the budget deficit is projected at just over 5 per cent for this year. The government recently announced, what, €37 billion in budget cuts. I appreciate that there are concerns over whether regional governments (about 30 per cent of spending) can bring things in but still. The Spanish government has made the right moves, there are no solvency issues here – and yet bond yields continue to rise – with no negative information to go on. Just a spontaneous combustion it seems.

For last night the 10-year yield rose 10 basis points to 6.07 per cent and the Italian 10-year rose 7 basis points to 5.59 per cent – obviously if this continues there will be a problem, but last night it was brushed off.

European stocks were generally higher – the DAX up 0.6 per cent, the CaC up 0.5 per cent, while the FTSE rose 0.3 per cent. Spanish stocks fell though – down 0.6 per cent last night and over 15 per cent for the month. Euro for its part was up about 120 pips or so (from 1630 AEDT) to be at 1.3136.

Otherwise for the price action we saw US treasuries not do a lot at all. Yields on the major t-notes are virtually unchanged, with the 10-year at 1.98 per cent, the 5-year at 0.85 per cent and the 2-year at 0.27 per cent. Aussie futures were up 3 ticks on the 3s (96.80) and 1 tick on the 10s (96.250). Other than that Australian dollar is up 25 pips or so to 1.0356.

A few bits and pieces otherwise. In terms of the data, US business inventories and sales remain solid, rising 0.6 per cent and 0.7 per cent respectively in February. Not so good was the Empire manufacturing index which fell to 6.6 in April from 20.2 (historical average is 9.98) but it’s very volatile and I wouldn’t take much from this month’s data.

So looking at the day ahead – at 1130 AEDT today we get the RBA’s minutes and I’ll be especially interested in this set. The drum beat of rate cut hysteria is rapid – it’s loud. In prior communications, the board suggested that we would need to see a material slowing in demand and we have certainly not seen a material slowing – demand is above trend. Which of course is why I was very interested in this change of focus to output in the latest RBA communication – output, according to headline figures is below trend. Again, I might be reading too much into this, but the distinction is important and the distinction was made by the RBA board according to the press release following the rate decision.

The thing is, monetary policy is much better at directly influencing demand – this is why that change in focus is so interesting. Monetary policy is a demand management tool, and indirectly through this, output is influenced. But as we know, and just looking at the headline numbers, demand is strong already – output less so. So I find the board’s focus on output intriguing. In any case, and as I highlighted yesterday, if you could be bothered to look into the detail, measures of output and demand are telling the same story. Output, when you exclude the impact of the floods last year is actually running above trend as well. In particular, manufacturing has accelerated sharply. This is a fact. Also a fact is that demand is running above trend. It is disingenuous for anyone to suggest otherwise.

Also out at 1130 AEDT are Aussie car sales. Otherwise, keep an eye out for UK and European inflation tonight and the German ZEW survey. Then for the US we get housing starts and industrial production.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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